Diagnosing Healthcare, Part 2: Penicillin, Politics, and the Rise of Employer-Based Insurance

In late summer 1928, Alexander Fleming returned to his famously cluttered laboratory at St. Mary’s Hospital in London, unaware he was about to make one of medicine’s greatest discoveries. Fleming, equally known for his brilliance and untidiness, began sorting through neglected Petri dishes left behind during vacation. One particular dish, contaminated with mold, caught his eye—not for the mold itself, but because the surrounding bacteria had vanished. Intrigued, Fleming meticulously studied the mold, Penicillium notatum, uncovering its powerful antibacterial properties, which he named "penicillin."

Yet penicillin remained largely unnoticed for over a decade, a medical curiosity trapped within academic circles. It took the brutal necessities of World War II to thrust penicillin into prominence. Thousands of soldiers wounded on the battlefield survived initial injuries only to succumb to deadly bacterial infections days later. Scientists Howard Florey and Ernst Chain revisited Fleming’s mold, isolated, and mass-produced penicillin. Almost overnight, infections once fatal became curable. Medicine had entered a revolutionary new era, defined by tangible cures.

Simultaneously, American medicine itself was undergoing dramatic transformation. As mentioned in Part 1, following Abraham Flexner’s influential 1910 report, medical education was revolutionized, closing substandard schools and instituting rigorous scientific training. Physicians emerged as respected professionals, earning unprecedented public trust.

Hospitals also transformed from primarily charitable institutions serving the poor into professionalized centers of advanced medical care. The American College of Surgeons, established in 1913, was instrumental in this transformation, introducing stringent accreditation standards. Accredited hospitals proudly displayed their status, reassuring the public of their excellence in medical care.

Medical specialization flourished as well. Specialty boards—starting with the American Board of Ophthalmology (1916) and soon followed by others like the American Board of Surgery (1937)—enforced rigorous training and certification standards. Physicians became trusted specialists, expected not merely to comfort, but to cure.

Despite these advances, healthcare remained financially perilous for most Americans. In 1920, fewer than 5% of Americans had health insurance. By 1939, only about 9% had coverage, mostly through limited hospital plans like Blue Cross. The Great Depression magnified these vulnerabilities, forcing families to choose between financial stability and necessary medical care. Hospitals were also struggling financially. Medical care was growing more expensive, and hospitals required their bills to be paid to remain solvent.

When Roosevelt entered office in 1933, the Great Depression was in full force. There was widespread poverty, high unemployment, hunger, and no way for people to pay for healthcare. In response to this deepening crisis, President Franklin D. Roosevelt initiated sweeping reforms collectively known as the "New Deal," aimed at rescuing the nation from economic collapse. Roosevelt’s New Deal included ambitious public works programs like the Civilian Conservation Corps (CCC), the Public Works Administration (PWA), and the Tennessee Valley Authority (TVA). He introduced the Agricultural Adjustment Act (AAA) to stabilize farming, established federal oversight of banks, and created safeguards like the Federal Deposit Insurance Corporation (FDIC). Central to these reforms was the landmark Social Security Act of 1935.

Roosevelt put together a team of experts, to design what we now call the Social Security program. It would have Social Security, unemployment compensation, aid to families with dependent children, later known as welfare. This whole package of things that we now think of as the welfare state were put together between 1934 and 1935. Included in this plan was universal healthcare coverage, but physicians, who thought and behaved like small business owners, were staunchly opposed.

Roosevelt, sensing how difficult passing universal healthcare would be, never forcefully pushed its passage. In a 1934 speech he asserted, “On some points it is possible to be definite. Unemployment insurance will be in the program. I am still of the opinion expressed in my message of June eighth that this part of social insurance should be a cooperative federal-state undertaking.” Yet when it came to universal healthcare, he said, “Whether we came to this form of insurance soon or later, on this I am confident that we can devise a system which will enhance and not hinder the remarkable progress which has been made and is being made in the practice of the professions of medicine and surgery in the United States.”

The American Medical Association (AMA), deeply protective of physician autonomy, vigorously opposed federal healthcare involvement, branding Roosevelt’s proposals as “socialized medicine.” The AMA publicly denounced Roosevelt's health insurance plan. Physicians engendered people’s trust at this point in history, and the public was very deferential to doctors' judgments. So, the opposition of the AMA was a roadblock to passing Social Security.

Opponents also exploited lingering anti-German sentiment from World War I, portraying universal healthcare as suspiciously "Prussian" and un-American. Southern Democrats further complicated matters. Influential senators such as James Byrnes of South Carolina and Ellison "Cotton Ed" Smith adamantly opposed federal healthcare initiatives, fearing mandated racial integration of segregated Southern hospitals. Faced with this multifaceted opposition, Roosevelt reluctantly removed healthcare coverage from the Social Security Act.

Despite this compromise, the Social Security Act of 1935 remained groundbreaking, establishing critical social protections. It created old-age pensions (Social Security), provided unemployment insurance, and offered financial assistance to dependent children and the disabled. These measures fundamentally reshaped America’s social safety net, though universal healthcare was notably absent.

The issue of healthcare coverage reemerged dramatically during World War II, under very different circumstances. Wartime inflation and labor shortages compelled Roosevelt to impose strict wage and price controls through the Stabilization Act of 1942. The industrial war effort required factories operating at full capacity, and employers were desperate to attract workers but could not offer higher salaries. In addition, since most able-bodied men were called up for duty, employers needed ways to entice women and other nontraditional workers into the workforce.

Desperate to attract scarce labor without raising wages, companies creatively began offering non-wage incentives, you guessed it, like health insurance. Employers got their workers, workers got their health insurance, and even unions had a potentially new bargaining chip. Yet it was unclear if this “benefit” was part of the wages one earned, and whether this “benefit” was included as part of a worker’s taxable income. In 1943, the War Labor Board ruled that health insurance and pensions were not subject to wage and price controls, and the IRS ruled that an employer's portion of health insurance premiums was not considered taxable income for employees.

Initially, some labor union leaders worried that employer-provided healthcare benefits might weaken their bargaining power for higher wages. Conservative legislators also expressed concern about eroding tax revenues. However, overwhelming business enthusiasm and public support quickly quieted dissent. As the war came to an end, hospital care had improved so much it became essential to people's lives in a way that it hadn't before. The discovery of Penicillin as we mentioned, and the discovery of sulfa drugs made medical and surgical care much safer with better outcomes. Employer-sponsored health insurance rapidly became standard, surging dramatically from covering 9% of Americans before the war to 23% by the end of WWII. This number would increase to more than 50% of the population by 1950.

With the vacuum created by government’s failures to pass healthcare reform, employers during World War II were in the best position of any non-governmental organization to spread the cost of insurance and to manage it administratively. Employer-sponsored health insurance, improvised as a solution to the temporary problem of wage price controls, became the roots of the private insurance system in the United States. Thus, healthcare became intricately linked to employment, reshaping the landscape of American healthcare policy profoundly and permanently.

In Part 3, we will examine Roosevelt’s final attempts to revive universal healthcare at the close of his presidency, Harry Truman’s subsequent passionate crusade for reform, and how President Eisenhower strategically embedded employer-sponsored insurance permanently into American tax law, laying foundations for the ongoing healthcare debates still resonant today.

References:

• Starr, P. (1982). The Social Transformation of American Medicine. New York: Basic Books.

• Flexner, A. (1910). Medical Education in the United States and Canada: A Report to the Carnegie Foundation for the Advancement of Teaching. New York: Carnegie Foundation.

• Blumenthal, D., & Morone, J. A. (2009). The Heart of Power: Health and Politics in the Oval Office. Berkeley: University of California Press.

• Quadagno, J. (2006). One Nation, Uninsured: Why the U.S. Has No National Health Insurance. New York: Oxford University Press.

• Katznelson, I. (2013). Fear Itself: The New Deal and the Origins of Our Time. New York: Liveright Publishing.

• Gordon, C. (2003). Dead on Arrival: The Politics of Health Care in Twentieth-Century America. Princeton: Princeton University Press.

• Berkowitz, E. D. (2012). The Other Welfare State: A History of Social Security and Medicare. Ithaca: Cornell University Press.

• Stevens, R. A. (1999). In Sickness and in Wealth: American Hospitals in the Twentieth Century. Baltimore: Johns Hopkins University Press.

• Morris, C. (2015). The AMA’s Campaign Against “Socialized Medicine”: Physicians, Politicians, and Public Relations in Mid-20th Century America. Baltimore: Johns Hopkins University Press.